Attracting Capital for an existing Investment Partnership (U.S. Based)

[jmp8822]

In January 2015, I started a value-based fund.  Fund performance has beaten the S&P 500. (Prior personal returns are good too, but not as relevant and not marketable) I haven't attracted investors well via traditional methods with people I know - there seems to be too much catching-up to do with "what is an investment partnership, why would I do something different, etc., etc."

 

All that said, does anyone have any experiences, or suggestions based on adding my fund to an online database, where perhaps investors would inquire about my fund? Which databases should I look into? Or other methods of attempting to raise capital, i.e. has anyone ever been to "fund raising happy hours" (suggested by my audit firm, could be a sales pitch to use the other third-party service providers that host the happy hour, I would also have to fly there). Is anyone on the IB fund list, and been able to raise money via IB investors?

 

Thanks.

[Jurgis]

You mean you started a hedge fund?

 

Go to some meetings with CoBF folks (like DJCO, Fairfax, maybe Berkshire). Get them to know you and like you. If oddball or someone recommends you on the forum, you might get a bunch of investors. Or maybe various parties in SYTE orbit would invest directly...

 

I can't speak about the limitations of advertising. If you write good letters with good results and they are posted here by people who get them and there's interest, you might get some investors too.

 

Good luck.  8)

[winjitsu]

Big investments banks hold fundraising conferences + weekly events, but capital raising will come at a fee. I've sat on the other side of these cap-intro events, most are large funds or new funds with pedigree (former big fund partners launching their new strategy, new products from mega funds). Honestly, for a small fund, I don't think its worth your time and costs to institutionalize [get the right GP/LP offshore structure, get the expensive audit firm etc etc.... you set yourself to fail unless you get $50mm AUM+].

 

Sumzero has a database of LPs and you can put your fund info / write-ups on their platform waiting to be discovered. You can publish your quarterly letters on Harvest. You can cold email endowment funds.

 

Tons of people with experience starting their own fund on twitter. Check out this tweet storm from Artko Capital:

 

 

[LR1400]

Go for it! What do you have to lose?

 

I’ve raised some money for real estate purchases. The money is tied up for multiple years. The main driving factor for success was some credibility (from me and experienced partners), preferred returns, and a prospectus tied to my “customer”.

 

I probably hit 20%-30% success rate and I wasn’t raising millions.

[ScottHall]

You need to build some character and I don't mean that in the usual way. Stories run the world and you can make money rain from the heavens with them. The best hedge fund managers know how to market themselves as characters to stand out from the crowd. Vanilla Value Version V doesn't do anything to get people excited. Even returns matter only so much in a way; there's seemingly hundreds of minor league hedge fund managers out there with great track records, with way less AUM than they "should have."

 

Way I see it there's two kinds of fund managers. The ones who try to make a buck through portfolio returns and the ones who try to make a buck from attracting more assets. I think too many of the smaller hedge funds don't understand enough about storytelling. Copying Buffett's letter only means something to the in-group, and there is a market there. But for the wider world you might need something that is more of a spectacle. Bill Ackman has been great at that. A lot of little league fund managers think he is a laughingstock now because his AUM is shrinking.

 

But even with the bad returns, he's still collecting fees on HOW MANY BILLIONS? Oh.

[oddballstocks]

You need to build some character and I don't mean that in the usual way. Stories run the world and you can make money rain from the heavens with them. The best hedge fund managers know how to market themselves as characters to stand out from the crowd. Vanilla Value Version V doesn't do anything to get people excited. Even returns matter only so much in a way; there's seemingly hundreds of minor league hedge fund managers out there with great track records, with way less AUM than they "should have."

 

Way I see it there's two kinds of fund managers. The ones who try to make a buck through portfolio returns and the ones who try to make a buck from attracting more assets. I think too many of the smaller hedge funds don't understand enough about storytelling. Copying Buffett's letter only means something to the in-group, and there is a market there. But for the wider world you might need something that is more of a spectacle. Bill Ackman has been great at that. A lot of little league fund managers think he is a laughingstock now because his AUM is shrinking.

 

But even with the bad returns, he's still collecting fees on HOW MANY BILLIONS? Oh.

 

I'd log into Amazon and start buying books on marketing and sales.

 

Traction

Spin Selling

Pitch Anything

Tested Advertising Methods

 

You just had an 'ah-ha' moment, and if you embrace it you will do well.  You just realized you are running a business, but have no idea how to do the thing that keeps a business alive, selling.  You also learned that the whole "returns matter" is a myth and that the academic theory about commodity businesses is false as well.  I mean why aren't people beating down your door?  You charge the same and have a better product than competitors?  Hmm, maybe a commodity business doesn't exist.

 

Build out your unique value proposition.  Why am I investing with you?  What's different?  Why are you unique?  This is why we have so many niche funds, because this is how they sell.  The problem is everyone thinks selling Buffett works, it doesn't, there are too many doing it.  Sell something different. 

 

Unless you're doing 50% a month, or flipping houses, or doing real estate courses, or some options trading program you don't sell returns.  If you sell returns money flows when it's hot, and by hot you need something that will pack an venue because people are greedy.  But....even then returns don't sell, they get people interested, in any of these return based scam things they get people there then they have hard closers working like dogs to convert people.  The pitch is mostly the same, the product is good and you'll miss out if you leave.  How will you feel if you miss out?  That's a very basic psychologial mechanism, the feeling of losing out.  It won't create long lasting customers, but if all you want is $5k for a seminar who cares?

 

Why did you start a fund?  What's your background?  Here are some concrete examples.  You used to be a doctor, but now you're a fund manager.  You'll be using the scientific method to discover investments.  You are great under stress, and can handle extremely complicated situations.  You have an edge in bio-related stocks.

 

Think unconventially.  I talked with one guy who marketed himself as follows.  He joined the nicest country club where he lived.  He went and golfed EVERY DAY.  He would go alone and join up with anyone looking for a partner.  Then he'd give them stock tips.  His strategy was that 99.9% of the people would forget the stock he named.  He didn't care.  If a stock went up in a few weeks when he was with them again he'd mention that fact.  "I mentioned XYZ last time, it's up 15%"  He obviously never mentioned ones that went down.  This got people interested in him.  And they were his perfect clients, doctors, lawyers, executives.  He grew his fund from $1m to $40m like this in a year or so.  He runs a vanilla value fund, but he marketed and sold.

 

This is your greatest challenge right now.  I'd put 100% of your energy into it.

 

[racemize]

Alternatively, you could just get good returns, have a small fund, and have a salary that increases with your ability to compound capital.  You have to get to $2.5 or so for your overhead to be low, and your salary is decent at $5 to $10--good enough to live on as a value investor anyway (or have enough savings to get there). 

 

So I would ask why do you need to be a big fund?  I'd rather have a small quiet fund with great partners (not just the hot money your likely to get, that won't stay during periods of underperformance) that pays enough for me to live on and compounds rather than just trying to get rich by collecting assets. 

 

But maybe you want to collect assets and be rich.  Then performance doesn't matter and selling does as Nate and Jurgis said.  I know a guy who had a small fund (I think around my size but maybe a bit bigger) and switched to long volatility, as in, his fund only invests in long volatility products.  He has $300 AUM now.  It's a good story and isn't too hard to sell people on the niche of "historic low volatility" and "you need insurance for this market!"  He's fun to talk to.

 

[oddballstocks]

Alternatively, you could just get good returns, have a small fund, and have a salary that increases with your ability to compound capital.  You have to get to $2.5 or so for your overhead to be low, and your salary is decent at $5 to $10--good enough to live on as a value investor anyway (or have enough savings to get there). 

 

So I would ask why do you need to be a big fund?  I'd rather have a small quiet fund with great partners (not just the hot money your likely to get, that won't stay during periods of underperformance) that pays enough for me to live on and compounds rather than just trying to get rich by collecting assets. 

 

But maybe you want to collect assets and be rich.  Then performance doesn't matter and selling does as Nate and Jurgis said.  I know a guy who had a small fund (I think around my size but maybe a bit bigger) and switched to long volatility, as in, his fund only invests in long volatility products.  He has $300 AUM now.  It's a good story and isn't too hard to sell people on the niche of "historic low volatility" and "you need insurance for this market!"  He's fun to talk to.

 

Yes, if you're already wealthy and can live off your returns when why bring in partners?  I agree with that.  If you have a few million of your own cash forget partners.

 

But if this is $2.5m of partner money you'd be better off working at Costco.  At $2.5m you'll have $25k in management fees, and let's say you earn 10%, the historical market return (being realistic, not pie in the sky) so the fund earns $250k.  You get 10% of that, another $25k.  You're at $50k before expenses.  You have to pay for healthcare, compliance, legal fees.  You can earn $23/hr at Costco today with set hours, and healthcare.  After tax you walk away with more.

 

The problem is there is a rubicon here.  If you have the ability to do this professionally for someone else you might make $80k-120k at some fund.  To do that on your own you need $10-15m in assets.  And suddenly $10-15m isn't hobby money anymore.

 

As racemize said, if you're content being a hobbyst that's awesome, live off your own capital and enjoy life.  But if you're wondering how to grow your business then you need to learn to sell, like the vol guy, the country club guy, like anyone else who sells.

 

And let me say, selling isn't bad.  When I want to go to the park on a sunny day but my wife wants to mulch I am selling her on my idea.  As an analyst/PM you are SELLING others on your ideas.  When you interview for a job you're selling yourself.  When you're trying to win an argument you're selling your ideas.  When you try to get accepted into a college you're selling your ability.  Once people accept and realize that we all are in sales things get much easier.  This isn't some slimy door to door vacuum thing.  And when I see so many people against the idea of selling it makes me realize that most people have no idea how sales and business actually work, and second why some people are successful and others aren't.

 

[racemize]

Well, if I were going to compound at 10% in your scenario, I'd rather be the guy with the fund than Costco.  You've described a $50k salary--sure it's low that year, but in 7 years, it's 100k.  In 14 years it's 200k.  That's assuming absolutely no one adds money, which won't be the case. 

 

E.g., I spend a minimal effort on attracting capital (a few meetings a year), but I'd say I have a decent network of friends/family.  I started with $700k outside capital (my GP partner and I added more).  We ended up with $2 million more additions from those and other partners, adding more of our own capital along the way.  After 4 years, we are at $6.5 million. 

 

Maybe we are inadvertently decent at selling though.  When we do sit down with someone, I think our conversion rate on meetings to partner is 60% or so.  I've thought about why that is the case, I'm guessing it is:

 

1) We don't actually care if the potential partner joins or not; and

2) We're so straight-forward/honest that people just tend to trust us.

 

Or maybe just that my GP partner is really tall, certainly doesn't hurt...

[stahleyp]

If any lurkers (or others) have a solid track record (I'm not talking about a 1% or 2% outperformance vs the S&P 500) with most of their own money invested in the fund (and reasonable expenses), I'm happy to hear from them.

[Pelagic]

Build out your unique value proposition.  Why am I investing with you?  What's different?  Why are you unique?  This is why we have so many niche funds, because this is how they sell.  The problem is everyone thinks selling Buffett works, it doesn't, there are too many doing it.  Sell something different. 

 

Interesting discussion. It seems from your reasoning, there is a strong incentive to focus on a niche and build a story around it in order to attract capital. If you're the only small cap Somali value fund, there's probably a subset of investors that would be interested in investing in it whereas a small cap US value fund that invests alongside everyone else has a tough slog ahead in terms of selling themselves.

 

Related question, does the comparative ease of selling a niche fund force managers into a corner where while it may be easier to attract capital, it's also more difficult to produce returns because of the constraints they've placed on their fund's scope - assuming they or their investors care about returns - some investors may just want "exposure" to a certain niche for a small allocation of their portfolio. I.e. they'd produce better returns as a vanilla value fund but wouldn't have a fund if that's what they were.

[oddballstocks]

Build out your unique value proposition.  Why am I investing with you?  What's different?  Why are you unique?  This is why we have so many niche funds, because this is how they sell.  The problem is everyone thinks selling Buffett works, it doesn't, there are too many doing it.  Sell something different. 

 

Interesting discussion. It seems from your reasoning, there is a strong incentive to focus on a niche and build a story around it in order to attract capital. If you're the only small cap Somali value fund, there's probably a subset of investors that would be interested in investing in it whereas a small cap US value fund that invests alongside everyone else has a tough slog ahead in terms of selling themselves.

 

Related question, does the comparative ease of selling a niche fund force managers into a corner where while it may be easier to attract capital, it's also more difficult to produce returns because of the constraints they've placed on their fund's scope - assuming they or their investors care about returns - some investors may just want "exposure" to a certain niche for a small allocation of their portfolio. I.e. they'd produce better returns as a vanilla value fund but wouldn't have a fund if that's what they were.

 

The niche could be anything.  Look at bigger funds, the sales point is "I went to Harvard, I know a lot of fancy people, I will use my connections that you don't have to make money." And that works.  And I know someone who went from $0-$4b with that exact sales pitch.

 

There are people on here selling their access to Buffett.

 

Some funds sell stability, the "we won't lose your money" type mantra.

[stahleyp]

Build out your unique value proposition.  Why am I investing with you?  What's different?  Why are you unique?  This is why we have so many niche funds, because this is how they sell.  The problem is everyone thinks selling Buffett works, it doesn't, there are too many doing it.  Sell something different. 

 

Interesting discussion. It seems from your reasoning, there is a strong incentive to focus on a niche and build a story around it in order to attract capital. If you're the only small cap Somali value fund, there's probably a subset of investors that would be interested in investing in it whereas a small cap US value fund that invests alongside everyone else has a tough slog ahead in terms of selling themselves.

 

Related question, does the comparative ease of selling a niche fund force managers into a corner where while it may be easier to attract capital, it's also more difficult to produce returns because of the constraints they've placed on their fund's scope - assuming they or their investors care about returns - some investors may just want "exposure" to a certain niche for a small allocation of their portfolio. I.e. they'd produce better returns as a vanilla value fund but wouldn't have a fund if that's what they were.

 

The niche could be anything.  Look at bigger funds, the sales point is "I went to Harvard, I know a lot of fancy people, I will use my connections that you don't have to make money." And that works.  And I know someone who went from $0-$4b with that exact sales pitch.

 

There are people on here selling their access to Buffett.

 

Some funds sell stability, the "we won't lose your money" type mantra.

 

Got to love those that make it seem like they won't lose money...who then lose 80% like LJM Preservation and Growth Fund.

 

To what other said, you really have to determine what's most important. Performing for clients or being an asset gatherer. Some can do both but size hurts performance big time in most cases.

[oddballstocks]

Well, if I were going to compound at 10% in your scenario, I'd rather be the guy with the fund than Costco.  You've described a $50k salary--sure it's low that year, but in 7 years, it's 100k.  In 14 years it's 200k.  That's assuming absolutely no one adds money, which won't be the case. 

 

E.g., I spend a minimal effort on attracting capital (a few meetings a year), but I'd say I have a decent network of friends/family.  I started with $700k outside capital (my GP partner and I added more).  We ended up with $2 million more additions from those and other partners, adding more of our own capital along the way.  After 4 years, we are at $6.5 million. 

 

Maybe we are inadvertently decent at selling though.  When we do sit down with someone, I think our conversion rate on meetings to partner is 60% or so.  I've thought about why that is the case, I'm guessing it is:

 

1) We don't actually care if the potential partner joins or not; and

2) We're so straight-forward/honest that people just tend to trust us.

 

Or maybe just that my GP partner is really tall, certainly doesn't hurt...

 

A manager at Costco earns $110k per year after a few years.  Nothing is static.  My point is how many years do you need to slug it out before you're earning more than someone at Costco? Or what about an analyst at a fund?  For someone at a fund 14 years might be a PM job, and that pays much more than $200k, plus investing on the side.

 

My point is with small dollars you're doing it because you enjoy it, that's why I call it a hobby.  I invest my money on the side, it's a hobby too, there is no shame in that.

 

I'd argue you are probably ok at selling, but don't realize it.  You called it out, your honesty, that's called building rapport.  People buy from people they trust.  Your honesty endears them to you.  And you're also willing to walk away from a bad deal, so you can wait for good deals.  My guess is if someone had $500k and they were a 'perfect' partner, you would seriously pursue them because you'd want them on board, you'd value what they bring to the relationship so you'd pursue them.  That's sales in a nutshell.

 

Your story is motivating for OP.  You get out there and talk to people, and talk to friends of friends, that's simply it.  This isn't rocket science, but it requires doing something.  That's where OP needs to start.  Figure out what's unique about you, then start talking.

[racemize]

May all our hobbies earn $200k! (or $50k).  Actually, we don't charge any fees right now anyway, so it actually costs me some money at present.

 

The other thing I'd say, and this gets to Nate's point--almost everyone I meet with doesn't read anything I've written.  They also don't usually pay any attention to our record.  As far as I can tell, they just decide if they trust you and think you are smart/successful, and then most of the time they hand you some money, even after only 45 minutes and a meal.  Most people are more interested in what else they have going on in their lives than reading about investing.

[stahleyp]

Joel, are you still working or focusing on the fund full time now?

[racemize]

Joel, are you still working or focusing on the fund full time now?

 

I'm transitioning still--I work a couple of days a week and spend the rest of the time on the Fund.  I can basically retire without the Fund making any money in a couple of years anyway, so this is a second job/side gig that can will turn into a career once it: A) has a size that is appropriate and B) has a record I'm happy enough with.

[Jurgis]

Then performance doesn't matter and selling does as Nate and Jurgis said.

 

Just to be clear, I never said that.  8)

 

And let me say, selling isn't bad.  When I want to go to the park on a sunny day but my wife wants to mulch I am selling her on my idea.  As an analyst/PM you are SELLING others on your ideas.  When you interview for a job you're selling yourself.  When you're trying to win an argument you're selling your ideas.  When you try to get accepted into a college you're selling your ability.  Once people accept and realize that we all are in sales things get much easier.  This isn't some slimy door to door vacuum thing.  And when I see so many people against the idea of selling it makes me realize that most people have no idea how sales and business actually work, and second why some people are successful and others aren't.

 

What oddball and ScottHall say IZ DA TRUTH.  8)

 

But even though I know that, I choose not to spend time on selling or on honing the sales technique. I don't find that interesting and/or exciting. Yeah, I know if I focused on sales more, I'd likely be richer (have better job? maybe; have higher salary? probably; have better wife? no; have better friends? maybe). But I'm fine with what I have. And honestly if I really wanted to make my life better (TM - in some way), I'd find a way to spend less time on investing and more time on doing AIish projects.

 

But then I am at a point in life/wealth/etc. where I am mostly fine with what I have and what I will have, so maybe it's OK if I slack off on selling.  8)

For young people and overall people who want to achieve something: listen to oddball and ScottHall! Dey are da messiahs!  8)

 

----------------------------------------------------

 

On the topic of performance, management letters, clients and niches:

 

Some time ago I was looking for an outside money manager(s) and even did invest with someone.

I pretty much gave up on that, so possibly I'm very bad and very non-representative client, but here are some thoughts.

Performance matters - a lot - for me. If performance was better, I would not have walked away even though I had other reservations.

Letters matter for me - I do read them, racemize.  8)

Cloning Buffett is possibly trap - if you clone Buffett, I can clone him too. If you invest in BRK, so can I. So...

OTOH, if you go full Bruce Berkowitz and stuff your fund with Fannie/Freddie, Sears, etc., you'd better be generating these 30-50% per year returns, cause otherwise I'm definitely not investing with you...  8)

If it's SMA and you trade like there's no tomorrow, please don't. I'll hate you at the tax time.  8)

 

Minor quibbles why I don't invest with outside managers (just ignore this paragraph): I hate doing the whole accredited investor paperwork - some people don't ask for much, but some require info/papers that I'd rather not give; I still hate the whole K1 form, so no hedge funds... ; majority of my money is in IRAs/solo-401(k) which are a pain to move and a lot of SMAs/hedge funds don't handle.

 

OTOH, if stahleyp is looking for huge outperformance, most of the time you can't get in: the outperforming person gets swamped with money. Also, you have to think what you gonna do when/if that huge outperformance craters... Pull out?

 

BTW, if a non-investor friend or relative asked me for advice on investing, I'd decline to give one. But if I was pushed, I'd suggest XX% in market index, 100-XX% in bond fund. I would not suggest any hedge or mutual funds. Sorry guys.  8)

 

Anyway, sorry for ramble, don't get offended, have fun and lots of performance and fees.  8)

[stahleyp]

I can't say I'm looking at huge outperformance but better than what I do (about 7% above S&P 500 over the past 10 years) and tax efficient.

 

Jurgis, I didn't know you were such an old man!

 

Joel, if you're pulling down $200,000 a year from the fund alone and assuming your wife work, I'd say that's pretty good to take the chance. I'm sure you guys have a decent savings already

[Jurgis]

I can't say I'm looking at huge outperformance but better than what I do (about 7% above S&P 500 over the past 10 years) and tax efficient.

 

LOL, this is huge outperformance IMO. If you find someone who can do this, send me a pointer. I might even give up on my principles of not filling K1 and beg them to take my money...  8)

Edit: I assume you meant 7% annual. If you meant 7% total over the 10 years, then I'll edit/remove my comment.

 

Sorry if I forget someone from CoBF or outside CoBF (feel free to speak up for yourself or anyone you know 8)), but from people managing other people's money I may not know anyone who had such outperformance.

 

Jurgis, I didn't know you were such an old man!

 

I'll take that as a compliment.  8)

Now get off my lawn!  :P  ;D  8)

[racemize]

If it were me, I would read everything and performance would matter--I think this is what everyone assumes, as that's the kind of people that are on this forum.  I've just noticed that it seems much more important whether the person decides they trust you and everything else is kind of... unimportant?  So if you want a lot of assets, it is definitely story and sales driven, just like people are saying.

 

With regard to performance, I used to want 5%+ annual outperformance per year.  After looking over all those famous investors records in the essay I posted recently and looking at the prospective returns of the market over the next 10 years--I think 10% a year is going to look very good going forward.  So, while my 2010-current record is around 19% a year (mostly from 2010-2013), my personal goals are at least 10% a year and to beat the market (I'd be happy with 2%+ outperformance).

 

Stahley, I don't think you're going to find much luck in your criteria!  Also, we're waiving fees due to size, and I want our performance to be better, so I'm not pulling any money from this.

[thowed]

Maybe this is going back to basics, but I think you need to consider what a fund does, in the first place, i.e. is it a pure Long Equity fund, does it do index/individual shorting, is it multi-asset, does it invest in blue-chips or micro-caps etc. etc.

 

Then you can figure out what performance/outperformance you are looking for/expecting.

 

So for instance with Akre, I'd probably be looking for him to outperform the S&P500 or Russell 3000.  Whereas with Alluvial maybe I'd want DW to outperform the S&P600, though maybe it should be a more global small-cap index.

 

I take the point made that a lot of people don't read the materials or listen much - I've heard this a fair bit from managers.

 

Long/Short funds are interesting, as you have to work out if they're trying to reduce volatility with their shorts, or just create extra alpha.  That said, 99% of people who short don't do it successfully over the long-term in my experience, so maybe it's not that relevant.

 

To go back to the Original Post - I suppose that if your fund has a different approach, then that's a way of marketing it (as long as you find the minority of people who read enough to discover this).

 

Without more info, I wouldn't know where to start with you, as I don't know how you've beaten the S&P500 since Jan 15, though generally speaking I'd guess it hasn't been easy for a Value investor.  I always think it's good to state whether you are likely to outperform in a bull market and underperform in a bear market, or vice versa, as that gives people a sense of what to expect.

 

For people doing US large-caps, I think any long-term outperformance of the S&P500 is damn good - I know a number of people on this forum have done it, but if you look at the institutions, it's a pretty rare thing.  Unlike some others, it's a pretty efficient index.

 

Anyway, I hope this makes sense , I'm chucking this off the top of my head...